Part 2 of 4

Pensions in a Changing Climate

Part 2: Governance & Communications

This is the second part of a four-part report assessing the world’s largest pension funds responses to climate change and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The parts cover specific areas from the survey and follow the structure of the TCFD core recommendations. The full report has been split into 4 parts:

Using AODP survey data, this part explores the performance of the world’s largest pension funds on the governance of climate-related risks and opportunities. The report will also review feedback from pension funds on harmonising green finance standards, barriers to low carbon investment, and challenges in implementing the TCFD framework. To ensure you receive the following parts, please get in touch with Peter Uhlenbruch, AODP Investor Engagement Officer, on peter.uhlenbruch@shareaction.org to be added to the AODP mailing list.

Key Findings

This section presents five key findings relating to how the world’s 100 largest pension funds have responded to climate change in their governance structures and communication with savers. These findings cover the following areas: fiduciary duty, communication with members, board oversight and executive accountability, climate-related training, as well as TCFD support and reporting.

Finding 1: Leaders indicate they have a fiduciary duty to consider climate risk in their investment decisions

1.1. Leading pension funds are publishing statements on fiduciary duty and climate risk

Our data shows that around a quarter of the largest pension funds indicate that they have a fiduciary duty to consider climate risk in their investment decisions, with the majority of those who recognise their fiduciary duty to climate-related risk receiving a rating of B or above. It is positive to note that 11 of the largest leading pension funds have released public statements on fiduciary duty and climate risk. This trend is reflected in our recent Winning Climate Strategies report, which found that leading asset owners recognise that the consideration of climate risk is part of their fiduciary duty.

Figure 1: Fiduciary duty and public statements*

*Pie shows the percentage of funds who indicated they approach climate from a fiduciary duty perspective; bar shows the percentage of those who make a public statement to that effect.

“A failure to act without urgency on climate change is a failure on your fiduciary duty.”– Al Gore, PRI in Person, San Francisco (2018)

Pension fund trustees who recognise they have a fiduciary duty to consider climate risk in their investment decisions and asset stewardship are well placed to meet an ever-evolving policy and regulatory environment. This is particularly relevant as regulation is developing to clarify investors’ fiduciary duties around climate risk. For example, the European Commission is in the process of clarifying investors’ duties with respect to considering financially material sustainability issues. In the UK, the Department for Work and Pensions (DWP) has recently announced it will require pension fund trustees to disclose their investment approaches to ESG and climate-related risks.

Figure 2: Proportion of funds indicating they have a fiduciary duty* to consider climate risk

*AODP acknowledges that the term ‘fiduciary duty’ is not used in some jurisdictions (such as in Sweden), and factors into this analysis any indication from funds that climate issues are considered in the long-term best interests of their ultimate beneficiaries.

1.2. The majority (68%) of funds do not recognise climate change and its implications as a material risk

Despite the Paris Agreement, the emergence of global consensus around the TCFD recommendations, and rising climate volatility, it is surprising to find that the majority of the world’s largest pension funds do not recognise climate change as a material risk.

1.3. A quarter of the funds that acknowledge the materiality of climate change are yet to make the link to fiduciary duty

28% of the funds that acknowledge climate change as a material issue have not yet linked climate-related risks and opportunities to their fiduciary duty. For those funds who do not recognise climate change as material risk, further regulation and legal clarification around fiduciary duty and ESG issues may be required.

Figure 3: Climate as a material issue and link to fiduciary duty*

*Pie shows the percentage of funds recognising climate change as material; bar shows the percentage who acknowledge climate change within their fiduciary duty.

Finding 2: Pension funds are failing to communicate with members on climate change

2.1. Less than one-fifth of funds communicate with members on climate change

Our data shows that only 18% of the largest pension funds communicate directly with their members on climate change. Failing to communicate with members around climate issues has already resulted in incidences of litigation for pension funds, as evidenced by REST, an Australian fund, currently being taken to court by a member over alleged inadequate disclosure around climate change.

Figure 4: Communication with members on climate issues

Our Winning Climate Strategies report revealed that the most common approaches used to communicate with members on climate-related issues include newsletters and online content (including social media and webinars). Even among leaders, few have taken the next step towards building a meaningful two-way dialogue with their members via innovative approaches such as member delegate programmes or climate-focused events.

2.2. Where applicable, just over 10% of funds offer climate-related investment options to members

Where members are able to self-select investments (usually defined contribution (DC)/401K schemes), just over 10% of funds offer savers an investment option that is climate aware in its approach (sustainability, ESG, SDG, low-carbon etc).

3.1. The majority of pension funds lack basic climate governance

As reflected in figure 5, the majority of the largest pension funds show no indication of considering climate change at the non-executive board level. Only a third of non-executive boards discuss their fund’s strategy on climate change.

Figure 5: Non-executive board oversight of climate issues

3.2. Governance oversight and accountability are correlated with good overall performance

A high score on governance of climate change showed strong positive correlation (0.75 correlation coefficient) with overall percentage score. This illustrates that robust governance of climate issues is absolutely central to good management of climate-related risks and opportunities. This finding is supported by AODP’s Winning Climate Strategies.

A similar picture can be seen in figure 6 at the executive level, with only a quarter of funds having a specific senior executive (C-level) accountable.

Figure 6: Executive accountability on climate issues

Finding 4: Only a quarter of assessed funds provide climate-related training for employees

4.1. The majority of climate training is ad-hoc

Just 10% of the world’s largest pension funds have disclosed that they provide structured climate specific training for their employees. Other funds (just under 15%) provide only ad-hoc training, or climate training combined with ESG issues for employees.

Figure 7: Overview of climate training initiatives at company and non-executive board level

Of the 10% of funds who provide structured climate training, only half provide it for non-executive board members. A small number of pension funds undertake climate-specific training targeted below the board or executive level, leaving out key decision-makers.

Finding 5: TCFD endorsement and disclosure yet to become mainstream

5.1 Less than 20% of funds undertake or intend to undertake TCFD-aligned reporting

Our data shows that less than 20% of funds are already reporting or intending to report in line with the TCFD recommendations. These funds are well prepared for possible regulatory changes requiring mandatory disclosure of climate-related risks and opportunities.

Figure 9: Funds reporting or intending to report in line with the TCFD recommendations

Our Winning Climate Strategies report reveals how some asset owners are already integrating TCFD-aligned reporting into their public disclosures, either as stand-alone reports or sections of pre-existing public reports.

5.2 There is limited public support among pension funds for the TCFD recommendations. Where public support has been forthcoming, these approaches are starting to be incorporated into corporate engagement.

Our research shows that only a quarter of the world’s largest pension funds have expressed public support for the implementation of the TCFD recommendations by companies or investors.

Figure 10: Public support of TCFD by pension funds

The majority of these have also incorporated the TCFD framework into company engagement practices by encouraging TCFD-aligned reporting. The findings suggest that the TCFD disclosure framework is becoming recognised as best practice for engagement with corporations by investors seeking improved disclosure.

Industry perspectives on challenges in TCFD implementation

AODP’s 2018 pension fund survey included a question asking for feedback and challenges regarding the implementation of the TCFD recommendations. We briefly discuss some key themes identified in this report. These reflect some of the common barriers identified in AODP’s recent Winning Climate Strategies report.

1. Scenario analysis

The most commonly identified challenge among respondents was scenario analysis. Respondents commented on lack of clarity and guidance as to how investors are expected to perform scenario analysis and incorporate the findings in investment strategy. We will be exploring the pension funds’ industry response to scenario analysis in Part III.

2. Lack of data

Respondents commented that there was a lack of reliable data to improve investment decisions. Our Winning Climate Strategies report noted that while climate data is far from perfect, it can still be used in a variety of innovative and constructive ways.

Conclusions & Recommendations

It is our view that large global pension funds have a fiduciary duty to manage their funds in the long-term interests of their members and beneficiaries, which includes building appropriate responses to climate change as a material investment risk. Our research shows that the majority of the world’s largest 100 pension funds are yet to acknowledge climate change as a material issue, have built a basic climate governance framework, communicate with their members on climate-related issues, or have published TCFD-aligned reporting.

This is the second instalment of a four-part series outlining the results of the survey. We have highlighted a number of recommendations relevant for this section, with further recommendations to follow.

FOR REGULATORS

The data collated in this survey (Part I and II) highlights the need to improve the quality of reporting on material climate-related issues among pension funds. In response to this issue, we believe regulators should be introducing mandatory reporting requirements in line with TCFD recommendations.

This report indicates that there is a significant amount of uncertainty toward trustees’ fiduciary responsibility in relation to climate change and its implications. Regulators can help pension fund trustees by providing clarification on investors’ fiduciary duties around managing material ESG risks.

FOR MEMBERS/ BENEFICIARIES

The findings have revealed a clear lack of member and saver communication around climate issues. Members and savers are encouraged to engage directly with their pension providers to improve the quality of climate-related reporting. Failure to do so may constitute a breach of legal duties on the part of providers.

FOR PENSION FUNDS & TRUSTEES

Ensure climate governance is fit for purpose

Robust governance, employee and executive educational programs, and clearly structured reporting are central to ensuring climate-related risks and opportunities are adequately understood, managed, and clearly communicated to savers and external stakeholders. Pension funds without adequate climate governance structures are encouraged to refer to AODP’s Winning Climate Strategies report, which provides building blocks and best practice examples from leading asset owners in this area.

Acknowledgments

ShareAction gratefully acknowledges the financial support of the European Climate Foundation, Finance Dialogue, Hewlett Foundation, and the KR Foundation for this project. These foundations kindly supported this project, but the views expressed are those of ShareAction. More information is available on request.

We would further like to thank the panel of experts who gave their time to provide guidance to inform this research project, and particularly the development of the methodology and feedback during the review process.

We also acknowledge the efforts made and time given to supply information by individuals who were nominated to represent their companies in this assessment.

Find out more

This is the second of four related publications we will make between September and November 2018 to draw attention to the role of global public pension funds in managing the risks and opportunities of climate change. Contact Peter Uhlenbruch, AODP Investor Engagement Officer, on peter.uhlenbruch@shareaction.org if you would like to be notified about the next instalment of Pensions in a Changing Climate.